Maruti Suzuki launches new Alto, this is how stock market reacted; should you buy shares?

Investors were trading cautiously in Maruti Suzuki shares on Wednesday they dropped by nearly 2% or Rs 134, after touching an intraday low of Rs 6,908.40 per piece on Sensex. However, at around 1253 hours, Maruti shares were trading at Rs 6963.10 per piece down by Rs 79.55 or 1.13% on the index. Investors selling sentiment in Maruti did not change, despite the company launching a New Alto with enhanced safety features and captivating design. Not only this, Maruti is also set to launch new 1.2 litre DUALJET, DUAL VVT BS VI engine with next generation Smart Hybrid technology in Baleno. Experts from Kotak Institutional Equities have also reduced their target price for the stock. 

Hitesh Goel, Nishit Jalan and Rishi Vora analysts at Kotak Institutional Equities said, "We believe domestic passenger car demand is likely to grow at only 5% CAGR over the next two years while MSIL will grow at a slightly higher pace of 7% CAGR. Our analysis suggests that car demand is likely to remain sluggish due to – (1) increase in car prices led by safety and emission regulations and (2) slowdown in urban demand. In 4QFY19 rural demand also slowed down, which led to a rise in dealer inventory levels (45 days at the end of March 2019 versus 15 days at the end of December 2018). We expect MSIL to gain market share by 130 bps over FY2019-21 largely led by an increase in the share of petrol vehicles in the industry mix due to the sharp rise in diesel vehicle costs once BS-VI regulations are implemented in April 2020."

The trio further added, "We expect MSIL’s EBITDA margin to improve in FY2020 (versus 3QFY19 levels) led by operating leverage benefit, reduction in commodity costs and reduction in discounts. MSIL is focusing on reducing discounts as volumes are not coming back despite MSIL offering higher than usual discounts. Hence the company is likely to wait for demand to come back than push demand through increase in discounts and promotions."

According to Kotak, competitive intensity is benign in the industry as capacity utilization levels for both MSIL and Hyundai are >90% levels while the rest of the industry (except Volkswagen) is at <70% levels.

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Thereby, Kotak's analysts added, "We cut our earnings estimates for MSIL by 10-12% over FY2020-21 mainly driven by a 4% cut in our volume estimates and 100-110 bps cut in our EBITDA margin estimates. We have decreased our fair value to Rs 6,700 (from `7,500 earlier). We value the company at 22X our March 2021E EPS + Rs 1,423 mn of cash and cash equivalents. We downgrade the stock to REDUCE from ADD earlier." 

In a filing on Tuesday, Maruti highlighted that the customers of New Alto will witness a change in price predominantly due to factors such as additional safety features, new technology and design and compliance to BSVI regulation. With these changes, the New Alto becomes the first entry level segment car to be compliant with the contemporary safety and environment regulations. R S Kalsi, Senior Executive Director (Marketing & Sales), Maruti Suzuki said, "The New Alto is India’s first BSVI compliant entry segment car with a powerful engine and high fuel efficiency of 22.05 km/l. We are confident that the New Alto will be a car that young Indians will be proud to own.”

Also, the new BS VI compliant Baleno (Petrol) with Smart Hybrid will soon be available at NEXA showrooms across the country. The technological advancement leads to improved fuel efficiency while reducing vehicular emissions. Existing 1.2L VVT petrol engine variants will also be BS VI compliant and available in all variants including CVT.